Going global

The convergence of International Financial Reporting Standards (IFRS), both in Europe and around the world, has changed the landscape in 12 months, writes Robert Bruce

The implementation of International Financial Reporting Standards (IFRS), both in Europe and around the world over the last year, has been the most extraordinary event. For Europe, where it became compulsory for listed companies, it was a big-bang, everything changes in a one-year period, event. Elsewhere around the world it was implemented as a means of keeping in touch and going with what is now seen as the prevailing system of financial reporting. In the US it was largely ignored.

But what has been even more extraordinary is that an event which bred much fire and fury beforehand in Europe appears to have now settled into acceptance, with occasional outbreaks of irritation. In many ways it has been a triumph for the dogged and determined approach of Sir David Tweedie, chairman of the International Accounting Standards Board (IASB) and the architect of the new system. You can hear an element of surprise in his voice as he tells you: “Five years ago, if I had realised the position we are in now, I would have settled for it.” “The big thing,” says Kathryn Cearns, consultant with London City lawyers, Herbert Smith, “is that it has all gone remarkably well.”

And these views are echoed around the world. “In Australia the adoption is going extremely well,” says Jeffrey Lucy, chairman of the Australian Securities and Investments Commission. “From a regulatory perspective we are confident there is widespread adoption without problems.” “It all went so well, particularly in the UK,” says Sondra Tarshis, head of accounting policy at Barclays. That is not to say that there is not considerable surprise at this. Charles Grieve, director, corporate finance with the Securities and Futures Commission in Hong Kong, compares it with the much feared, but almost non-existent, millennium bug. “It may be a Y2K,” he says. “We all spent massive resources. So it is no surprise to companies and analysts. And everyone has now marched on.” “There has been very little of companies missing their deadlines or companies having such problems that it has caused a huge fuss,” says Cearns, “and there has been nothing which has surprised the market.”

Knock-on effect

So the first hurdles have been overcome. This has allowed more countries around the world to come voluntarily into the fold, keen to ensure that their financial reporting will be comparable with that of other countries and also keen to attempt to gain the advantage of the cheaper cost of capital which, it is assumed, will flow from a global acceptance of IFRS. One of the most significant changes in recent months has been moves from China towards an IFRS acceptance. And the decision by Canada to follow the IFRS trend rather than the US GAAP system, under which its closest and giant neighbour, the US, runs its markets, is also felt to be particularly significant. It also produces a knock-on effect. “Canada going with IFRS rather than US GAAP,” says Tweedie, “has influenced the Latin American countries.” And there are other extremely significant realignments taking place which will have a growing effect in the years to come. The whole issue of financial reporting has been seen as a battle between Europe and the US. “In the Pacific area,” says Lucy, “China and many of the developing countries are moving towards the IASB approach. And that, in time, will add a third dimension to the relationship between the EU and the US.” The world is growing closer on IFRS.

None of this means that the preparers of accounts, the CFOs all over the world, are necessarily cheering unreservedly. Martin Cubbon, group finance director of Swire Pacific in Hong Kong, represents the reluctance of many. His view is that the system may well now be securely in place, but it does not produce many of the advantages that were promised. “The mechanical exercise of accounting under the new rules is not insurmountable,” he says, “but what it produces is excessively complex and I doubt that the overall message from the accounts is particularly helpful.”

“A lot of time and effort went into it,” says Tarshis. “We’ve done it and now let’s see if we get the gains from the effort, like a real single market.” “I don’t find accounts any more comparable cross-borders,” says Cubbon, “so they fail that test absolutely.” There is also an acceptance that, with the figures having become so much more complex, other methods of explaining to shareholders and stakeholders will have to be employed. “Companies have to explain their results,” says Grieve in Hong Kong, “and the analysts have dealt with it.” But it will be difficult in this first year post-implementation. “Analysts say they have got so much information that they can’t process it all yet,” says Cearns. “But they are resetting their models and gaining more insight.” And it does mean that narrative reporting will come into its own as the way to put across much of the underlying strategy of companies. “We know what we have to do to explain our underlying numbers,” says Cubbon. “We know how to produce a meaningful explanation.”

The next stage is waiting to see what effect the relatively benign implementation of IFRS will have on the US. The early aim is to achieve acceptance from the main US regulator, the Securities and Exchange Commission (SEC), that companies with a US listing will no longer have to produce parallel accounts under both IFRS and US GAAP. And further down the road the goal is convergence of IFRS and US GAAP.

“The key issue is the convergence process,” says Robert Herz, chairman of the US Financial Accounting Standards Board (FASB). “That will take a while. But there is the whole issue of mutual recognition beforehand and whether the SEC will amend or drop its requirements.” It will be a difficult time. “We need to carefully manage the tension between the US and Europe over that time,” says Lucy in Australia. “The IASB needs to manage a high level of dialogue.” The first step is for the SEC to assess the results of the IFRS process. “The SEC has to decide whether or not consistent implementation and application have taken place,” says Herz. “We will see. The SEC will review that over the summer.”

One problem is that, in the US, the movement towards IFRS has largely gone unnoticed, except in the very largest global companies. “Implementation has had a major impact in Europe,” says Andrew Bonfield, CFO with Bristol Myers-Squibb, the pharmaceutical giant, “but not much of an impact here in the US. Here, Sarbanes-Oxley has been the priority and IFRS hasn’t really registered as a major issue.” It is the old cultural difference between the US and Europe. The US prefers rules. Elsewhere a principle-base system is dominant. “You can never say never,” says Bonfield, “but it will be a long time before US regulators will be happy with a much lighter principle-driven system. There is a need for a substantial change of heart.” To an extent Herz agreed. “FASB is a big supporter of principle-base standards,” he says. “But companies and auditors ask for rules. It will take more than just standard setters to change that.”

But that is the long view. In the meantime, the IFRS implementation process has proved much more successful than anyone really hoped. “The pressure is now on,” says Tweedie. “People do not want to be left out. People realise that investment will go wherever people can understand the accounts.”

Robert Bruce is a leading commentator on accounting and financial reporting issues and is a regular columnist for the Financial Times.